Key Takeaways:
- The Reserve Bank of India (RBI) does not want a faulty price index while finalizing its own action plans at a time when global inflation, particularly in the aftermath of the Russia-Ukraine crisis, is putting pressure on major central banks to act.
- The monetary policy committee will meet on April 6-8 to discuss key policy rates and inflation forecasts. Despite the index’s limitations, CPI inflation exceeded the upper band of the Reserve Bank of India’s 2-6 percent objective for the second month in a row in February. It’s anticipated to break through the barrier again in March, boosted by recent fuel price hikes.
- Bitcoin has the potential to be a good inflation hedge. The very hyped safe-haven investments, such as precious metals and real estate, that buyers seek out in times of rising prices are those that are scarce or transfer in the opposite direction of paper money or monetary assets. The invoice is suitable for Bitcoin.
The CPI, which the RBI uses to target inflation, was set a decade ago with 2012 as the base year and is due for a modification. Because of how far we’ve progressed with debt and financial instruments, some say inflation doesn’t follow the same pattern it did decades ago. However, the economy still has two major components: the monetary base and economic production (or, at minimum, the confidence in future economic growth).
A flawed price index seems to be the last thing the Reserve Bank of India (RBI) wants while firming up its own action plans at a time when global inflation, particularly in the aftermath of the Russia-Ukraine conflict, is pressuring important central banks to act.
On April 6-8, the monetary policy committee will convene to assess key policy rates and inflation estimates. Despite the limitations of the index, CPI inflation in February exceeded the upper band of the RBI’s 2-6 percent target for the second month in a row. It’s expected to surpass the threshold again in March, bolstered by recent fuel price increases.
The governor of the Reserve Bank of India (RBI), haktikanta Das, has stated that stagflation is not a concern for the Indian central bank. He also stated that the Reserve Bank of India (RBI) will continue to provide ample liquidity to sustain the economy. This means two things in plain English. First and foremost, excessive inflation will not stifle economic growth. Second, the RBI will continue to make sure that there is enough money in the financial system for individuals who want to borrow and spend to be able to do so at low interest rates.
Das recently stated that the 6-percentage-point-plus retail inflation was only temporary, but that the central bank’s 4.5-percentage-point prediction for FY23 would be “reworked.”
“There is no doubt that the current CPI basket is outdated,” said Pronab Sen, a former national statistician who also served as the chairman of the National Statistical Commission (NSC) at the time the CPI was last changed.
Over a tenth of the current CPI’s goods and services must be discarded. A top government official admitted that the heft of many more goods should be altered, and the product basket should be significantly broadened to reflect India’s shifting consumption patterns.
Interest Rates are Low
Because the inflation projection was prepared before the Ukrainian conflict, it is certain to be adjusted upwards. In addition, higher interest rates in the developed world will put additional downward pressure on the rupee. Since October, foreign institutional investors have net sold stocks worth $1.49 trillion, indicating that they were expecting something similar to happen. When foreign investors sell stocks, rupees are exchanged for dollars. As a result, demand for the dollar rises, while the rupee falls in value. Imports are becoming more expensive as a result of this, and considering that India imports a large portion of its energy, this impacts India swiftly.
One dollar was worth $74.5 on February 22, two days before Russia attacked Ukraine. It is presently valued at $76.3. Despite the RBI’s support for the rupee, the currency has fallen in value. The Reserve Bank of India has been selling dollars and purchasing rupees to sustain the rupee’s value. This increases the supply of dollars in the market while decreasing the availability of rupees, halting the rupee’s depreciation. In fact, the RBI’s foreign exchange holdings decreased by $12.2 billion between March 4 and March 18.
Some have recently critiqued the RBI for remaining ‘behind the curve’ by maintaining its growth-friendly accommodative policy stance. Such an argument could have gained more credibility if a timely revision of the inflation index revealed stronger pricing pressures in the economy.
Sudipto Mundle, a noted economist who chaired the technical team that presented a report to the NSC on back-series GDP data, emphasised the necessity for the CPI to be corrected quickly. If the government so desires, it can re-examine the findings of the 2017-18 consumer expenditure survey in order to make a quick revision of the index; it may then conduct another survey to update the index once again, he added.
After its launch in 2010, the CPI has only been updated once (with 2012 as the base year) (the first monthly CPI inflation rate was announced in January 2011). Previously, the government only measured retail inflation for a subset of the population (such as industrial workers and agricultural and rural labourers).
The WPI, however, was the dominant barometer of inflationary pressure even before the CPI was created. Since its inception in 1952-53, it has undergone six changes.
While the CPI revision is dependent on the consumption expenditure survey, government officials and analysts argue that any such survey will invariably reveal the necessity to discard a large number of goods and replace them with a large number of new ones. Even the representative sample, weight distribution, and brand selection for price quotations will need to be adjusted. Nokia phone prices, for example, would no longer be used to calculate retail inflation in the cell phone sector because the Finnish company accounts for fewer than 2% of such sales in India.
Bitcoin as an inflation hedge since the start of the Russian-Ukraine conflict:
The following is the ‘crypto against inflation’ argument:
- Inflation is the loss of a currency’s buying power.
- When the money supply in the economy expands, more money pursues the same amount of goods, resulting in inflation.
- The government controls the money supply by printing massive amounts of fiat to cover its costs.
- During the epidemic, the circulating USD supply in the United States increased by 35 percent.
- Crypto, on the other hand, cannot be printed at will by any centralised authority: its production is algorithmically controlled.
Bitcoin’s price has soared by 35% since Russia attacked her neighbour, according to Will Clemente, an Insight analyst at Blockware Solutions. “Bitcoin has closed above the short term holder cost basis for the first time since December 3rd,” the crypto expert continued, making it difficult for anyone to be “bearish.”
The market performance of the flagship digital asset amid a period of such political turmoil validates many proponents’ claims that the coin can act as an inflation hedge.
In recent days, the Russian government has signalled that it may use cryptocurrency in some of its operations. Despite the fact that the crypto community has previously said that the Putin-led Russia could not use cryptocurrency to circumvent sanctions.
This, in general, suggests that the crypto sector is impartial, since the Ukrainian government has successfully utilized it, while the Russian government’s recent pronouncements also hint at certain possibilities.
